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Lending, deposits increase at credit unions despite subpar economy

November 3, 2008
The pitch was breathless: If Finance Center Federal Credit Union would begin offering subprime home and auto loans, it would have to build a new building to hold all the profits.

In the Indianapolis credit union's boardroom about four years ago, visitors told CEO Roger Youngs he'd be crazy not to jump onto the subprime bandwagon.

He listened closely. But he didn't bite.

"You've made this sound way too good," Youngs recalls saying, "so we're going to pass."

While many banks were getting drunk on loose lending, most credit unions stuck to conservative lending and other plain-vanilla banking practices. These days, that traditional approach is looking wise.

Credit unions across the nation have kept their lending spigots open as banks go the other direction.

At Indiana's roughly 200 credit unions, home lending is up 11 percent, deposits are up 13 percent, and business lending is up 21 percent on the year, said John McKenzie, president of the Indiana Credit Union League.

"Credit unions weren't involved in the types of activities that caused the problems," McKenzie said. "A lot of people are looking at them as a safe haven and as the best deal."

To be sure, credit unions are feeling effects from a rocky economy. Many of the more than 8,000 nationwide have lost money, and 14 have been taken over by the National Credit Union Administration. Delinquencies and charge-offs on loans are up.

Indiana's 190 federally insured credit unions are feeling some of the pain. Delinquent loans and charge-offs were up 18 percent for the year through June, compared with the same period in 2007, data from the National Credit Union Administration shows. The number of customers filing for Chapter 7 bankruptcy more than doubled over 2007, to 2,214. And profit fell 8.6 percent, to $42.8 million.

But, as a group, credit unions are in better condition than banks. About two-thirds of mortgages generated by credit unions still are being held in credit-union portfolios. And less than 1 percent of the mortgage loans were delinquent in July, well below the national average.

"In good times, you'd say these guys are much too conservative," said George Hofheimer, chief research officer of credit-union analyst Filene Research Institute, in an interview with Time magazine. "But in times like these, it's just what the doctor ordered."

Credit unions are not-for-profit cooperatives that must answer to owner-members, not shareholders. Excess earnings are returned to members through lower fees and better rates.

"It's business as usual, and it's a relatively simple formula," said Youngs, of Finance Center. "You don't let people get in over their heads. There are times when the best thing you can do for a member is say no to them."

Deposits at Finance Center are up 9.5 percent so far this year, to $290 million. Residential and commercial real estate lending is up 11 percent.

Youngs, who used to be a banker, said he lives by a simple credo: It's about the member.

"We can argue from now until the cows come home with the bankers about what the differences are between credit unions and banks," he said. "We focus on the member, who serves the dual role of being our owner and who uses the services. We don't have to answer to anyone out of state."

Car loans are another booming business for credit unions, as car makers and many large banks have scaled back on auto loans, said Rick Rice, CEO of Teacher's Credit Union.

Many of the loans originate with dealers trying to line up financing for customers. Teacher's Credit Union views the market as an opportunity even as its auto-loan delinquencies and repossessions have risen slightly.

"If you got into subprime or buying portfolios of car loans in Florida or California, you probably have some issues," Rice said.

But Teacher's has stuck mostly with local loans. They're working with members, including those who have lost their jobs, even offering subprime loans in some cases to customers they deem creditworthy, Rice said.

The strategy appears to be working: Only $24,000 out of the bank's $9 million subprime portfolio is delinquent, Rice said. The delinquency rate of less than one-half of 1 percent is roughly the same as for the credit union's entire $1.7 billion loan portfolio.

The key: a conservative approach to loans, a strategy that also has benefited many community banks, Rice said.

"These kinds of times are good for those that stuck to the basics," he said. "Some competitors just aren't there anymore."
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